Aozora Bank Faces Challenges in U.S. Office Loan Market

by Warren Seah

Aozora Bank, a Japanese bank, has made the difficult decision to devalue its U.S. office loans by over 50%. This move comes as a result of the challenging conditions present in the U.S. office market, including rising interest rates and an increasing trend towards remote work.

As a consequence of this adjustment, Aozora Bank’s shares experienced a significant slump of 21%, making it the worst-performing stock in the Nikkei 225 index. Alongside this, the bank has also revised its annual profit forecast by 52% and its revenue forecast by 35%.

The devaluation of non-performing office loans by Aozora Bank was particularly harsh in certain cities. Chicago experienced a dramatic 63% reduction, while New York, Washington D.C., Los Angeles, and San Francisco faced reductions ranging between 51% and 59%. Aozora Bank provided commentary on the Chicago market, expressing concern about the time it will take for supply and demand balances to recover in urban areas. The bank noted that property sales remain very low. However, there was some optimism surrounding New York, as Aozora Bank believes that supply and demand in Manhattan will recover earlier compared to other cities.

These U.S. office loans accounted for $1.89 billion, which amounted to 6.6% of the bank’s total loan portfolio. Out of these loans, Aozora Bank categorized 21 as non-performing, resulting in a worth of $719 million. To mitigate the impact of these challenges, the bank has raised its loan-loss reserve ratio on U.S. offices from 9.1% to 18.8%.

Apart from the devaluation of office loans, Aozora Bank has also made adjustments to its securities portfolio due to losses incurred from foreign bonds, primarily driven by the increase in U.S. interest rates. In its fiscal third quarter, the bank sold securities worth 9.3 billion yen, with plans to sell an additional 26.7 billion yen worth of securities in the current fiscal fourth quarter. These losses largely stem from U.S. and European government bonds, U.S. mortgage-backed securities, and U.S. investment-grade bonds ETFs.

It is clear that Aozora Bank is confronting significant challenges in the U.S. office loan market. While the bank remains cautiously optimistic about specific areas, it is actively taking steps to address these issues and mitigate potential losses.

Related: Banks’ office-loan exposure remains a ‘mixed bag’ as lenders manage through downturn

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